Sanjeev Nayyar: Killing with kindness

Sanjeev Nayyar / New Delhi February 2, 2007

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Cotton procurement in Maharashtra is a prime example of the havoc wrought by good intentions.

Cotton farmers commit suicide in Maharashtra but prosper in Gujarat. The prime minister visits Vidharbha and announces sops, yet the suicides continue. Both states accounted for roughly the same proportion of the country’s production in 1991-92 (Gujarat was 12.7 per cent and Maharashtra was 10.5 per cent). While Maharashra’s share has increased only marginally in the period since, to 14.8 per cent in 2005-06, Gujarat’s share is up three times, to 36.5 per cent; Maharashtra’s area under cotton has grown just marginally, Gujarat’s has nearly doubled; and Gujarat’s yield is more than three times that of Maharashtra.

What went wrong is a classic story of how sops do little but bankrupt the exchequer and, at the same time, make the beneficiary so weak, he/she becomes uncompetitive. In 1971, when nationalisation was the flavour, Maharashtra launched the Cotton Monopoly Scheme (CMS) with the avowed aim to capture the whole economic value for the farmer, from growing cotton to selling  finished cloth. It proposed to do this by helping farmers get a fair       price for their produce, make available unadulterated cotton to consumers at reasonable prices, produce textiles and distribute bonus (profit on operations) to farmers. Therefore, the CMS allowed politicians to control the state’s cotton industry.

Under the scheme, cotton could be procured only by the state-owned Maharashtra State Co-operative Cotton Growers Marketing Federation Ltd (MSC). Farmers were to be given a bonus for the cotton they sold, but cotton produced in the state had to be pressed within the state only. On the face of it a good thing, this had four consequences.

One, since each cotton procurement area was managed by a grader, this functionary became a big power centre, extracting bribes from farmers — according to one ex-MSC official, graders commanded the highest dowry in their villages! Second, since the state had to procure the cotton, and bribes had to be paid to the grader, there was no real incentive to produce better cotton. Third, as the state had financial difficulties sustaining over-payments to farmers, the payments were delayed and, a few years ago, just stopped. Four, since till 1999-00, private sector units had to obtain a license to set up ginning and processing, entrepreneurs began setting up units in border towns in adjoining states, such as Burhanpur in Madhya Pradesh — cotton began to be sent out of the state illegally and value addition took place outside the state.

Also, the Managing Director of MSC was mostly an IAS officer, with short stints at that. None of which was designed to make learning the trade either possible or necessary for them.

If this hurt the farmer, the MSC wasn’t spared either. By virtue of being a cooperative, MSC could only borrow from a cooperative bank, in this case the Maharashtra State Cooperative Bank. The bank lent at 15-17 per cent and earned interest of nearly Rs 1,800 crore during a 30-year period. It was only after 2004 that MSC got loans from nationalised banks at interest rates of less than 9 per cent.

In neighboring Gujarat, in contrast, a combination of factors ensured production increased. First, unlike Maharashtra, Gujarat didn’t waste money on monopoly procurement and chose to invest it in creating irrigation. Over 40 per cent of cultivable land in Gujarat is irrigated as compared to just 3 per cent in Maharashtra. Also water levels across the state have gone up due to large-scale rainwater harvesting by the construction of thousands of check dams. Instead of the Rs 6,000 crore or so that were wasted on CMS, the Maharashtra government could instead have constructed 100 Kolhapur-type Bandhara dam (medium type dam) at a cost of Rs 60 crore each — this would have irrigated 25 lakh acres or 33 per cent of area under cotton cultivation. Indeed, in 1999-2000, both NABARD and the ministry of agriculture contributed Rs 100 crore each to create a Watershed Development Fund across the country — of the corpus of Rs 579 crore, only Rs 30 crore has been disbursed.

Gujarat also created its own brand, Shanker6, and entrepreneurial farmers took faster to using Bt cotton to reduce costs. While around 40 per cent of Maharashtra’s cotton farmers use Bt seeds, according to industry sources, around 80 per cent of the area cultivated in Gujarat is with Bt cotton. According to an IIM Ahmedabad study, this increases yields in irrigated areas by 35 per cent in Gujarat (48 per cent in Maharashtra) and profits by as much as 75 per cent in Gujarat (58 per cent in Maharashtra) — Gujarati farmers sell a better variety of Bt cotton and are able to realise a higher price as well. The same study took a sample across Maharashtra, Gujarat and Andhra and found a 24 per cent reduction in pesticide cost. It found that the Gujarati farmer spends Rs 4,649 per hectare on fertilizer versus Rs 7,116 in Maharashtra (with respect to Bt cotton).

There are other critical areas like rural credit where the government needs to act since it is clear the current system is not working (the accumulated losses of all co-operative banks till 2002-03 was Rs 9,277 crore). The state would do well to take lessons from the Cotton Corporation of India (CCI), which is the equivalent of Maharashtra’s MSC.

CCI administers the Cotton Technology Mission. As part of the mission it provides ginning and processing units a subsidy of 25 per cent of their modernisation cost (upto a maximum of Rs 12.5 lakh). It also conducts demonstrations on production technology whereby it demonstrates to farmers how cotton should be cultivated on one-acre plots and holds farmer field schools and kisan melas. It has started contract farming in Vidharbha. An informal association of farmers represented by select farmers sign a tripartite MoU with CCI and the textile mill. While various structures exist, the general model is that the mill provides farmers with inputs, conducts demonstrations and agrees to buy produce at a premium of 5-10 per cent of prevailing market price. This way the farmer focuses on production and quality, and the mill is assured of pure unmixed cotton.

The bottom line, though, is clear. However well meant, attempts at shielding groups from competition end up harming them more than anything else.

The author is CEO Surya Consulting. His email is suryacon@vsnl.com